How Yellen can justify another rate increase

Janet Yellen will be addressing the Kansas City Federal Reserve’s Economic Policy Symposium Friday in Jackson Hole, Wyo. I don’t know about you, but I can’t wait!

In fact, I’m so excited that I wrote a speech for the Fed chair. She probably won’t like it, but it’s the thoughts that count:

Howdy, y’all. Welcome to cowboy country.

Let me start with a story about Jackson Hole. Back in 1908, there was a crisis here. Herds of elk, which come here for the winter, were starving because of particularly severe weather. The townspeople decided to do something about it.

They brought hay to the elk, which were trapped in the valley. And you know what? Despite that effort, many elk still died of starvation because the next winter in 1909 was no better.

Why do I bring this up? Because the Federal Reserve has been doing its best to fix the US economy. And you know what? Many people — like those elk — are still suffering.

Our economic winter, which started nearly 10 years ago, is still with us. And I’ll be honest with you, this cold spell has been caused in large part by misguided actions taken by the Federal Reserve when I was vice chairwoman under Ben Bernanke and even when I took over as its head.

This is the point in my speech where I would usually dazzle you with razzamatazz economics-speak. I would talk about how we at the Fed are puzzled because the productivity of the American workforce is down.

And I’d normally tell you how bizarre demographics — particularly aging baby boomers — are causing a whole new view of the economy. I’d impress you with terms like the Phillips curve and the income elasticity of demand. Maybe I’d quote Adam Smith and John Maynard Keynes.

But today I’m going to be honest — maybe even to a fault.

The statistics we get from government agencies, especially the Labor Department and Census Bureau, make no sense. One month these numbers show an economy that’s picking up steam and the next they show weakness.

This pattern has been going on for years. And that causes me and all the people I work with at the Fed, as well as all the people on Wall Street who track us, to careen from optimism to pessimism in the time it takes us to book our next TV appearance.

But what’s really happening is simple: The US economy is bouncing along the bottom. Some months good. Some months bad. Most months nothing special.

All of you here and everyone watching this speech on TV really want to know just one thing: What do we plan to do with interest rates? So I’m gonna tell you.

The Fed made a big mistake when it drove interest rates down to near zero. It worked, at first. Banks, which we helped destabilize by keeping rates too low for too long and allowing many unworthy borrowers to get their hands on loans, benefited from that.

And so did people and companies who needed to borrow money. Or those who wanted to re-borrow money, namely the millions of people who refinanced their homes.

But the benefits ran their course a long time ago. The bad stuff is now happening. Millions of Americans who once lived off the interest on their savings can no longer do that. And since this interest income isn’t coming in, they can’t go out shopping.

Yes, people have made a lot of money in the stock market, thanks in large part to the Federal Reserve’s conscious effort to keep share prices up.

But the money made in the stock market is not the same as interest income. People are much less inclined to sell stock, which has transaction fees and taxes, when they want a new refrigerator.

So, in the end, economic growth is suffering from this shift away from savings to the much more risky stock market.

Bottom line: Interest rates need to rise, if for no other reason than we might have to bring them down again if the economy sinks.

But we at the Fed are afraid to push them higher. There are several fears. One is that the economy might not be strong enough to support more expensive borrowing. Another is that the stock market might react badly to a rate hike like it did to the one last December.

Sure, we rigged the stock market back then. But how often will we be able to get away with that trick?

We need an excuse that looks more or less solid before hiking rates. The good jobs reports in June and July helped. But if you have half a brain, you see that neither was particularly good.

Plus, the May jobs report was awful and economic growth in the first six months of 2016 made me sick to my stomach.

So what is the chance we will raise interest rates after our meeting on Sept. 20 and 21? Pretty good, I’d say.

Why isn’t a rate hike in September a certainty? Because there’s the employment report for August next week. And it might not be as good.

Lastly, I want to express one other concern, and his name is Donald Trump. If we raise interest rates and it slows the economy, or if the stock market crashes, it is almost certain that Trump will be elected president.

So we might change our mind about a rate hike, but maybe not, but maybe so, but maybe not. Oh, I hate this damned job!